"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision, author of Things That Make You Go Hmmm...one of the world's most popular & widely-read financial publications.

Sunday, 3 April 2016

Mining construction nadir moves another year closer

There has been a fair band of folk who have been hoping that the associated decline in resources investment and construction would throw Australia into a horrendous bust, with the shakeout leading to a credit crunch and a multi-year recession.

The good news is that although our terms of trade peaked almost four and a half years ago, and have come back by more than a third since that time, nationally there is still no recession on the horizon.

About a fortnight ago, Commonwealth Bank estimated in a delusively specific fashion that Australia was 74 per cent of the way down its "mining investment cliff". Forecasts released six months ago by BIS Shrapnel had outlined a considerably less optimistic scenario.

We obviously cannot know for certain where the nadir will ultimately be, but clearly in CommBank's view we are getting much closer to the end than we are to the beginning, and we can look forward to a day some time in the not too distant future when resources construction stops acting as such a punishing drag on the economy.

Swan dive continues

Engineering Construction Activity figures for the December quarter - a reasonable proxy for resources construction - showed that in seasonally adjusted terms the total value of work done for the private sector had dropped very sharply to be another 20.7 per cent lower over the calendar year at $16.9 billion.

This year-on-year drop of more than a fifth took quarterly private sector activity about a third below its 2012 peak of $25.3 billion.

The ABS also provides a smoothed "trend" data series, which records private sector construction activity peaking way back in September 2012, meaning that last Thursday marked 42 months since the quarterly peak.

As a bit of a bonus, public sector construction activity picked up across all four quarters of 2015 in trend terms, largely thanks to roads & highways construction in Queensland, acting as a handy shock absorber.

As the Reserve Bank had forecast, residential construction activity has picked up strongly in response to low interest rates, which has helped the Australian economy through the last 42 months.

Although the absolute value of residential construction work done is somewhat less impressive than the value of the resources mega-projects, residential building has a strong associated multiplier effect which has acted as a timely boost for the larger capital city economies.

State versus state

At the state level the bulk of the pain over the past three years has been taken in the resources regions of Queensland, with engineering construction activity in Q4 2015 in the Sunshine State more than 55 per cent lower than it was in Q4 2012, as coal and gas projects have transitioned to their respective production phases.

Western Australia still has large construction projects approaching completion, and as such the great weight of decline going forward will be felt in WA and in the Northern Territory.

Work commenced higher

Interestingly the value of engineering construction work commenced over the past year has recorded a small increase, driven almost exclusively by Queensland, and particularly in its heavy industry, roads and highways construction.

Indeed, the value of engineering construction work to be done remains quite elevated at about $69 billion. Of course this is a heck of a long way down from the dizzying peaks of 2012 at way north of $160 billion, but it is still worth remembering that before 2006 this figure had never previously breached $30 billion.

In short, there remains a historically significant level of engineering construction activity underway, supported by the record low cost of business funding.

There was another upside surprise today when it was announced that the $21.7 billion Adani Carmichael Project in the Galilee Basin could begin its construction phase as soon as next year - potentially a ripper outcome for the Queensland economy, if not for the environment.

The wrap

The good news is that the sharp end of the mining investment cliff has come and gone, and the national economy is perhaps just about emerging from the other side.

A bit shaken and stirred, yes - in fact, bashed, battered and bruised in the case of many resources regions - but still with no recession for Australia on the horizon.

Unfortunately there is a downside in the post from the inevitable over-investment of the commodity price boom, and that is that as supply ramps up some marginal producers will be forced to the wall as projects become unviable.

Indeed, Commonwealth Bank estimated that only 55 per cent of mining job losses have been experienced to date, and there are fairly regular ongoing reports of smaller resources companies mothballing operations or threatening to do so.

The mining industry is not a big employer in terms of headcount, so the absolute numbers may not be huge - in fact, mining employment even increased a bit over the past year - but this does mean that some mining regions and towns are set to suffer the hangover which must surely follow the heady mining boom years.

Nevertheless, 42 months after the construction boom peaked, Australia is in better shape that many had hoped or predicted. And that is something to be happy about.

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A huge week of news ahead with, among other releases, February data due for Retail Trade, Building Approvals, Overseas Arrivals & Departures, and the Trade Balance, which will reveal another substantial trade deficit in to the $2-3 billion range.

Building Approvals is a tough data series to predict month to month, but we can realistically expect to see a bit of a bounce after the preceding month's seasonal drop.

The Reserve Bank will leave interest rates on hold at 2 per cent on Tuesday, but analysts will be watching closely for comments related to the recent resurgence of the Aussie dollar, and whether this impacts any previously worded easing bias, real or imagined.